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Tax Fairness for Small Businesses: Supporting Our Nation’s Job Creators

By: Senator Susan M. Collins

Small businesses are our nation’s job creators. According to the Small Business Administration, small businesses employ more than half of all American workers and have generated two-out-of-three net new jobs since the 1970s.

Maine truly is a small business state, with nearly 300,000 of our residents employed by our more than 141,000 small businesses. That’s nearly 60 percent of our workforce.

Small businesses also make a great contribution to the American economy, generating half of our nation’s Gross Domestic Product of more than $18 trillion. They also account for 54 percent of all U.S. sales, 41 percent of private sector payroll, and one-third of our nation’s export value. Their success is critical to the health of our economy.

Unfortunately, our nation’s small businesses shoulder an unfairly heavy tax burden that can affect their ability to compete with large firms in the marketplace. A recent survey by the National Federation of Independent Business (NFIB), America’s leading small-business association, found that concerns about federal taxes on business income ranked high on the list of the top problems facing small business owners.

The reason for the unfairness is that, in many cases, the profits small businesses earn are taxed at a higher rate than the profits of larger corporations. Most of our nation’s small businesses are organized as pass-throughs, meaning that their profits are passed on to their owners and reported on individual tax returns as ordinary income at the end of every tax year. As a result, small business income is subject to taxation at individual rates, which can be as high as 39.6 percent at the federal level and can exceed 50 percent in some states. In contrast, the highest federal corporate tax rate is 35 percent. If we want our small businesses to grow and create more jobs, we must reduce these high marginal rates.

I believe Congress should undertake comprehensive tax reform to make our tax code simpler, fairer, and more pro-growth. And, as we do so, we must make sure American businesses of every size are given the opportunity to compete on a level playing field.

Aligning the tax rate for pass-throughs with our corporate tax rate will ensure that Main Street remains competitive. That is why, along with Senator Bill Nelson of Florida, I have introduced the bipartisan Main Street Fairness Act, which will link the tax rates of pass-through entities and large corporations to ensure that small businesses never pay a higher tax rate than large companies. The Main Street Fairness Act has been endorsed by the NFIB and the National Association of Manufacturers.

As a former Regional Administrator of the U.S. Small Business Administration, I know the importance of local businesses as the engines of economic growth. They sustain our communities and create good jobs. Small-business owners are our friends and neighbors, and they are among the most generous supporters of civic groups, local charities, youth sports, schools and virtually every other form of community activity.

As I travel throughout Maine, I see again and again the role innovative small businesses play in revitalizing our downtowns with shops, restaurants, and small manufacturing operations. The energy, ingenuity, and perseverance of small business entrepreneurs must be supported with tax policies that are fair. The tax change Sen. Nelson and I propose will help make sure that small businesses remain healthy, strong, and growing, so that they can continue to serve as America’s job creators.